Carter's Inc (CRI) 2004 Q1 法說會逐字稿

Good day everyone and welcome to the Carter's first quarter 2004 earnings conference call. On the call today are Fred Rowan, Chief Executive Officer and Mike Casey, Chief Financial Officer. After today's prepared remarks, we will take questions as time allows. If you have any follow-up questions after today's call, please direct them to Eric Martin, Director of Investor Relations. Mr. Martin's direct telephone number is 404-745-2889. Carter's issued its first quarter earnings release yesterday after the market closed. The text of the release appears at Carter's Web site at www.carters.com under the press release section.

Before we begin, let me remind you that statements made on this conference call and in the Company's press release, other than those concerning historical information, should be considered forward-looking statements and actual results may differ materially. For a detailed discussion of factors that could cause actual results to vary from those contained in the forward-looking statements, please refer to the risk factors section of the Carter's final prospectus dated October 23, 2003, filed with the Securities and Exchange Commission. Now I would like to turn the call over to Fred Rowan. Mr. Rowan, please go ahead, sir.

Thank you. Good morning. I want to thank each of you for joining our first quarter conference call. Mike Casey will follow my overview of the business with our financial results.

We had an excellent quarter as we demonstrated solid progress in each of our growth initiatives. We have confidence these achievements will provide the momentum to sustain high-performance for the remainder of the year and that these initiatives have significant longevity.

Before I speak specifically to our growth drivers, I would like to frame up our assessment of the young children's market and our competitive position. That target market is large; it is over 18 billion, it is consistently growing 4-5 percent and it is currently healthy. It is always a resilient market as mothers and grandmothers are determined to sacrifice for their young children. Add to that fact that current economic conditions are better. Traffic is up across all channels, it is reflected in recent comp increases and we're witnessing the same. Inventory levels are in good shape with our customer base and our inventory management is much better than planned. Our customer base, which is really the bulk of this sector, is concentrating on buying the best products from the best brands as opposed to this time last year, heavily discounting to relieve excess inventories. They are focused on increasing the open-to-buy for the power brands that have the best core products and highly capable supply chains.

There is a definite trend towards less product complexity. Product innovation is far more important than pricing discussions. These conditions mirror our philosophy of always reinvesting a large percentage of cost reduction in core products and supply chain superiority. We have never been under severe price deflation because of this discipline. These trends are not just relevant to the young children's market. We see it in the adult arena as well. Therefore, we are confident this is both an improving economy and a shift by the consumer to want better, not just less expensive. This puts us in an even stronger position to increase market share where we have good share positions already. This is most assuredly a market where the number one players will enjoy substantial gains.

With that, I will speak to our growth initiatives, which we like to think is the roadmap for the architecture for competitive advantage and increasing shareholder returns. Those initiatives are one, deliver dominant core products more frequently; two, become the leader in the playwear category; three, build dominant brands at Target and Wal-Mart; four, increase the productivity of our stores and the reach of our brands and five, construct a powerful global supply chain.

First and foremost is product innovation. We are enjoying our best spring sell-throughs ever, spring '04. It speaks to the breadth of the power of Carter's brand to have baby, sleepwear and playwear doing well. It is also a reflection of our talent upgrades beginning with our Chief Merchant, Robyn Rice (ph), and her capable team. It is also a result of the increased capability of the supply chain. Fall '04 begins shipping in May. The order base is strong we look forward to continued strong sell-throughs. We have turned around sleepwear with excellent selling, both fall '03 and now spring '04. We are well into the spring '05 product development cycle and I am personally impressed.

Secondly is playwear. We have a good progress report with substantial growth opportunities. As you would expect, this has been a learning curve for us. We have the strong point of view that we should move this category from high-fashion content to fashionable core essentials, thereby addressing consumer needs in customer and company profitability. This then enables us to forecast accurately, to ship at very high percentage levels and freshen the floor without high markdown risk. We have been making this transformation each season and '04 and '05 spring completes the cycle. Our spring '05 is a major step forward.

Thirdly, building brands with Target and Wal-Mart. Both of these customers are pleased with our work. Both have allowed us to lead with the same branded philosophy as we do with Carter's. That is, to launch continuous product innovation, supported by an outstanding supply chain (indiscernible). Then we extend the brand's scope with sleepwear and playwear to make each brand a lifestyle concept. This formula avoids extreme pricing pressure and the consumer is better served. Our sell-throughs are good at both retailers. They are well presented at the floor. Each brand is differentiated by product content and the marketing agenda. Service levels are excellent. We're gaining share and expanding categories. We're launching a new brand name for Target in December to replace Tykes. We have some royalty fees under Tykes as we don't own all categories. We also feel we have a better young children's name, which we own called Joy -- Just One Year. It was a successful sub-brand under Carter's that developed good awareness and a much stronger emotional connection with the consumer. Target is thrilled. We feel it is an important positive change.

Fourthly, our retail stores. We're very pleased with the results of our store initiatives. We had a good quarter despite severe weather patterns. Our comps for the quarter were up 3.7 percent versus down 5.7 last year. The turnaround initiatives were better product, better presentation of core product and easier to shop; superior shipping and replenishment of those core products and better planned consumer market. We have also converted 10 stores to better window displays, made them more dependent on core with a better gift offering. The results are encouraging as they are comping above the regions in the chain. We will roll out 50 more stores with this look by the end of June. We now have 22 strip stores outside of the (indiscernible) arena. Their performance is well above the chain's performance. This is a real opportunity. We just completed a test of a store whereby we relocated the baby category to the front of the store, versus at the back, along with displays of high emotional content. The results are superb. We are evaluating an aggressive conversion.

Fifthly, the global supply chain. Our intent is to accomplish several things. One is to substantially lower product cost. Two is to improve forecasting accuracy and increase shipping performance levels. Three is to reduce levels of inventory and increase turns. We have also put together a total cost reduction architecture delivering higher service levels. With respect to cost, it's is not just about lowering product cost. It has begun with renewed focus on reducing the complexity of each of the categories' SKU count. For example, we have materially reduced the complexity of sleepwear and playwear for fall '04 and spring '05 while we have upgraded the core products with no deterioration to market. Thus, our productivity and efficiencies are greater as we achieve significant gains in unit philosophy. It is easier to forecast when the leverage costs down.

Our sourcing partners benefit as well. We are concentrating on sourcing in fewer countries and fewer factories now that we have less complexity in growing unit volume. We're just beginning to leverage our growth. We're just beginning to build a strong offshore sleepwear formula. I feel it is important to understand we are still a young company in the global arena. We only moved offshore in late 1999. We only concentrated on playwear two years. We just upgraded our forecasting and planning talent 18 months ago. We have tested a new distribution concept which will offer substantially lower costs. We prefer not to elaborate for competitive reasons; however, it is very encouraging.

In concluding my prepared remarks, I feel better about our prospects for the next five years than the past five years because of these initiatives. This should keep us a high-performance company. Now I will turn it over to Mike Casey.

Good morning. I'd like to comment on our first quarter results and then I'll share with you our outlook for the second quarter and the year. We are reporting double-digit growth in revenue and earnings in the first quarter, we're also reporting continued expansion of our operating margins, improvement in our inventory turns, growth in cash flow and a further reduction in debt. Our first quarter results were better than what we had expected. Our consolidated revenues increased 10 percent. On a pro forma basis, net income in the first quarter increased 34 percent to $10.6 million; that is 36 cents a share. As planned, substantially all of the revenue growth in the first quarter was driven by shipments to our mass channel customers, Target and Wal-Mart. The mass channel growth was driven primarily by our new Child of Mine brand, which we began shipping to Wal-Mart in the second quarter of 2003. We also had solid growth with our Tykes brand sold at Target stores and we continue to gain additional floor space, given the strength of our product performance.

As planned, revenue from our wholesale business, the Carter's brand wholesale business, decreased in the first quarter. We had a difficult comparison to the first quarter of 2003 when our wholesale revenues were up 47 percent due to the timing of new product launches. We actually had good unit volume growth in our baby category. The growth was driven by the strength of our core products, like bodysuits, bibs, washcloths and other core items, which generally have lower average price points. But it's important for you to understand that lower average prices on our core products does not equate to lower margins.

A year ago, we were shipping high-priced baby products, which we referred to as limited additions. Limited Editions had high initial demand, but also had a less predictable demand curve and resulted in higher levels of excess inventory and related charges. And that excess inventory cluttered our retail stores and slowed our inventory turns. For those reasons, Limited Additions was edited out of our product line for fiscal '04 and the benefit from our focus on great core products shows in our first quarter results.

Our focus on improving Carter's sleepwear business over the past year drove a 7 percent increase in wholesale sleepwear for the first quarter. We have significantly improved the product benefits with better fabrics, better creatives, the introduction of a new to tree pack PJ, and we also had significantly better performance from our supply chain, in terms of on-time deliveries. We're very encouraged by the sleepwear results. More importantly, our customers are pleased with the sleepwear sell-throughs and our current projections show sleepwear growth for the year up over 10 percent.

We're at the tail end of our spring season, which began shipping last November and ends this month. Spring sleepwear shipments were up 7 percent; spring playwear shipments were up over 10 percent. Based on the strong product performance in spring, our fall playwear and sleepwear shipments are planned up approximately 10 percent.

With respect to the retail operations ended the first quarter, we had 170 stores. The store revenues were up 4 percent with comps up 3.7 percent. Those comp store driven by a higher number of transactions; transactions were up about 4.5 percent. I am particularly pleased with the growth, given the fact that the first quarter of '04 had one less week of selling. If you recall, 2003 was a 53-week year with that extra week falling in the first quarter. So we're comparing thirteen weeks of results in the first quarter of '04 against 14 weeks last year. That extra week in the first quarter of '03 was worth approximately $3 million in revenue for the stores.

We're also pleased with the performance of the stores that we have in strip center locations. Eight of our 22 strip stores comped in the first quarter and the comps of those eight strip stores were up 7.2 percent with transactions up 6.5 percent and average prices up about 7/10ths of a percent. We're continue to see strength with these stores having higher sales per square foot, higher gross margin, over 30 percent four-wall contribution and quicker inventory turns relative to the chain. We opened up one strip store in the first quarter and plan to open a total of 12 stores this year; the majority of those openings will be in strip center locations.

With respect to our margins, operating margins on a GAAP basis grew 80 basis points. Our gross margin in the first quarter was 20 basis points lower than 2003 due mostly to be higher mix of mass channel revenues. As planned, the decline in gross margin was fully offset by managing the growth in SG&A. SG&A relative to sales improved 120 basis points and our objective is to continue to leverage the investments we have made in our infrastructure and we expect the gross profit dollars will continue to grow at a rate faster than SG&A. For the year, our outlook for operating margins are projected to be up about 70 basis points.

Royalties from our licensing business increased 24 percent in the first quarter. It was driven by the licensed products that we have under the Child of Mine brand name. And the licensing business continues to be an important contributor to operating margin growth.

In terms of nonrecurring charges, the first quarter results included approximately $300,000 in after-tax charges related to the Costa Rican plant closures. That is primarily severance costs and the remaining severance costs will flow through the second quarter and those will be approximately $10,000.

In terms of liquidity, cash flow from operations in the first quarter was approximately $13.5 million; that's up 9 percent over last year, given the growth in earnings and a reduction in inventory. Inventories at the end of the first quarter were $91 million; that's 8 percent lower than March of '03. We've reduced the raw material and work in process components of inventories with our transition to full packet sourcing and the inventories in our retail stores were down 6 percent, down about 13 percent on a per-store basis with a cleaner mix of inventories, given the focus on core products, reduction of excess inventories and the success of our inventory management initiatives.

With respect to debt reduction, we reduced debt $7.6 million in the first quarter. That's about 4 percent at the end of '03 and we've reduced debt 30 percent since March of '03 with the proceeds from the IPO and other accelerated payments on a term loan.

CapEx for the first quarter was approximately $4.4 million. That includes investments to build out our new distribution center to prepare for the growth that we envision. In our long-term plan, we expect CapEx to be approximately $25 million this year. That includes about $8 million to finish building out the distribution center.

In terms of guidance, second quarter revenues are projected to be up approximately 12 percent. Our current view is $177 million of consolidated revenues for the second quarter. Second quarter diluted earnings per share is projected to be 15 cents on 29.9 million shares. That's up 36 percent compared to pro forma earnings of 11 cents in the second quarter of 2003. For the year, our current plans support 9-10 percent top line growth and diluted earnings per share projected to be up 23-25 percent. And that increase in guidance is driven by our first quarter performance.

That concludes the business overview and we will open up the call for questions.

(Operator Instructions). Dennis Rosenberg, Credit Suisse First Boston.

Good morning. Congratulations on another great quarter. Could you give us a little bit more detail on the brand change at Target, what that is going to entail, in terms of marketing spend on their part and what they are going to do to let the consumer know that it is a similar or the same product? And is there going to be any change in the product, any improvement in quality or any other kind of changes?

There's really no material change in the product. Same category, same core products. It really is in our opinion, both Target and ours, an upgrade in the brand itself. We will have all new marketing packaging. I think just a significant upgrade there. Everything that communicates the brand changes obviously with the new brand name. We will have joint circulars with Target as we roll in and set the floor up in January. There's no major advertising campaign.

Target is a terrific retailer. They get terrific traffic and they will be to our shop and Target, the customer will, we're not concerned about that.

Also, could you talk about the progress you've been making in adding different categories to both Wal-Mart and Target?

Yes. We are right on plan there. We have been extending the sleepwear business (technical difficulty). We are also -- our launch in the young playwear line with Target in the second half of this year, as you would expect, we start off the newborn and infant business and build up in age segmentation. We've had good discussions with Wal-Mart as well. So we fully expect to keep rolling over the next few years as we extend these categories. That is going well.

With Carter's, I might say -- I would say in all channels of distribution, including Carter's and the brands at the discounter, we find ways every season to increase the productivity of our basic business. Better product every year, higher productivity (indiscernible). With Carter's, we also have a Classics tiered group that is doing well, it's about 30 percent of the revenue mix at Carter's, and that is going well.

In playwear, at Carter's, we're growing well, we're adding racks, we're extending age categories and we're adding retailers as well. So we're feeling good on a broad base there.

Thanks and keep up the good work.

Kathleen Heaney, Maxim Group.

Good morning. Can we go into just a little bit more detail on the Carter's wholesale, the $6 million decline year-over-year? I realize you had said that you think the Kids R Us should probably lose 10 to 12 million for the year and I was just trying get a handle on what percentage was Kids R Us and maybe what percentage was just less orders from JC Penney?

Here's what I'd like to say. I think it's just to understand that decline, we had forecasted that decline middle part last year.

Yes, I understood that.

We were up against a big increase. I would say that , in terms of Kids R Us closures, that that impact what we will do with Kids R Us this year sure. But our growth was largely with babies R Us; that is where our strength has been in terms of growth. That's (indiscernible) Toys R us strength was; that's why they decided to close the Kids R Us stores. I don't think -- you shouldn't view that as any weakness in any particular account. We are forecasting that our wholesale business will probably be up 5-7 percent this year. So we don't have any specific concerns on any particular account. Whatever customer was shopping at Kids R Us, they're not shopping at Babies R Us or Kohl's or Penney's. The brand is widely available where should shopping.

Thank you.

(Operator Instructions). Margaret Mager, Goldman, Sachs & Co.

Good morning. A question on the wholesale, just following up on the last one. If you see the wholesaler priced at 7 for the year and they were down slightly in the first quarter, is there any particular quarter where you think it will be an above average quarter for the Carter's brand?

Most of the business, obviously, is done in the second half of the year. That is when fall starts to ship. And I would say that fourth quarter is generally a good, solid quarter because it has the tail end of fall and it starts with spring of '05. So we are expecting good growth for the balance of the year. You should not expect any decline in the quarter for the balance of the year.

And maybe Fred or somebody could give us a little bit of insight into what you are doing for spring '05. I guess the anniversary Rose and Little Squirt (ph) -- what are the plans?

We've had significant good results from the Carter Classics. As Mike mentioned, when we got out of the Limited Editions and we're really focused on the tiering with the Classics, we've had great results. So we've had new groups launching in the second half. And my opinion through our merchandising review (indiscernible) the spring '05 cycle, product development cycle, I just see an extraordinary improvement in all of our core products. I think our art's better, our colors are better. In many cases, we have upgraded base, fabrications. And with respect to playwear, we are getting very, very good at the core part. As I mentioned earlier, we have been converting from a fashion content to core business.

The sell-throughs are starting to demonstrate right now in spring '04 that it is a correct strategy. And as I see the spring product lines, I just see that we are then have gotten so much better in that core. It really is pretty dynamic merchandise. We will have that available come mid-year, so we can show you some prime examples of that. We start showing our major counts, the baby business, at the end of May. And then the first two weeks of June, we show them the playwear portion. In the first two weeks of August, we show the sleepwear portion of the business. I just feel that we've have a big uplift in product quality.

Thank you. That is very helpful and very solid quarter. Thank you.

(Operator Instructions). Ladies and gentlemen, we have no further questions on our roster at this time. Therefore, Mr. Rowan, I will turn the conference back over to you for any closing remarks.

I would just restate -- this company has a lot of legs to stand on, we have multiple platforms. We don't currently have any serious injuries. That's not to say that down the road, we don't have an A platform that is not hitting an A rate, but it won't materially affect our outlook. With that, thank you very much.

Ladies and gentlemen, this does conclude today's Carter's call. If you would like to listen to a replay of this call, it will be available beginning at 11:30 AM Eastern time today through midnight Friday March 5. The dial-in number for the replay is 888-203-1112 in the United States Canada and 719-457-0820 from international locations. The confirmation access to the replay is 561889.